By Martin Lonstrup & Magnus Steen
The General Counsel (GC) and the Legal functions are today actively looking for new ways to contribute and bring value to the table in the organizations. Contracts are an area where the Legal Departments can become a game changer and contribute true value, but in the role many are currently having, as a stand-alone risk orientated function they are doomed to be the opposite. There is a great opportunity for the Legal Departments to claim their part of the Contract Management responsibility and use Contract Management to position the Legal function for a more dynamic future by acknowledging that the Legal function is part of the Contract Management process and thus a value contributor to the business. Here is our view on how the Legal Departments can finally get on-board and embark on the journey of the continuous search for process optimization and focus less on the traditional Legal way of doing things more isolated. This is a journey most other departments in our corporations embarked on years ago.
How are companies doing on Contract Management today?
The general picture and state of mind on Contract Management is that some companies have initiated their Contract Management journey but that a lot of companies still fail to know where the contracts are and which obligations and rights are hidden in them. Contract Management has become an obvious problem and a risk so clear to everyone, yet something only very few organizations dare to address or manage to capture. One of the reasons is that ownership of the process itself and here is a real game changer opportunity for the GC and Legal Department but they have to step up, assign the ownership and responsibility of the Contract Management process – even if it lies outside the general comfort zone of Legal and involve more focus on administration, processes and business related – to times non-legal activities – it will pay off in the end.
Why is the contract management journey important for the company and the GC?
Agreements are important – they build the companies
No doubt, we are building our companies through agreements today. Suppliers, customers, designers, marketers, manufacturers – almost in all business areas we are doing outsourcing arrangements going both upstream and downstream. Imagine what your company would be worth if you had no contracts. Imagine what your company would be worth if you were brilliant at contracting. A lot of companies could probably achieve higher returns simply by raising the bar a little on contracting – it being from a risk perspective, efficiency perspective, a collaboration perspective, from a cost perspective and of course ultimately from the perspective of driving revenue and value.
There is of course a risk of misinterpretation when we are saying that a company should be brilliant at contracting – as it may be interpreted as to have best templates, or best skilled drafters or the most brilliant lawyers. However, it should rather measure what value is being captured, which risk is taken on, what process time is there for each contract, what learnings have been made? It should not be measured at the input; it should rather be measured at the output – By Legal taking on Contract Management it also forces Legal to see themselves as a service to the business rather than a necessity. Being brilliant at contract is not about the lawyers “legal qualities”, the approach taken to sourcing new suppliers etc., the negotiation methods alone – it is about the value that the change brings to the organizational mindset.
It is not a one man show
Surveys show that most companies today don’t have a single department or function being responsible for Contract Management – and the approach is rather a split between functions, sometimes tied together by a single person not necessarily assigned to that type of task or dedicated to manage the cross function minefield which results in responsibilities being fractured throughout the organization with no single department being accountable for the Contract Management initiative.
GCs have the opportunity here to take a lead in the Contract Management process, however not that the GC is solely responsible to carry out the tasks. Contract Management is a cross corporation process and thus hard for anyone to govern so definitely not suited for one man shows.
The GC is well positioned to assume such role. The GC is often secretary of the board, part of the executive team, close to management and has knowledge across the company from its wider involvement. No other function than perhaps the CFO is in a similar position, but given the skills inherited in the legal department such as contract content, drafting and negotiation skills.
Having said this, the GC needs to invest and increase skills in areas that a GC normally does not have. A GC would need process knowledge, an ability to employ analytic skills, close linked to procurement/sales and the GC needs to allocate all investments required, in form of systems, training and relationship building, more operational knowledge about the organization as well as an interest in cross functional and not particular legal specific tasks.
Reluctance is often seen from GCs to step up in this game, due to fear of administration and fear of getting locked into any and all agreements or simple lack of acknowledgment that this is an area which involve Legal at all typically represented by the more traditional view of Legal. However our experience is actually the opposite. Yes, investments in administration and system was made by the Legal department, however taking the steering wheel in the contract management process actually helped driving a corporation-wide prioritization when it came to contracting. In the end, it lead to more high value work being addressed by the Legal Department and work of legal low value being addressed by the business with a total lower risk for the company.
Taking charge of the Contract Management process to the contrary give the GC a chance to contribute with visible value to the company. Which is exactly what many GC actually are (at least saying that they are) looking for.
Compliance and order
Many companies maintain reasonably good order – upheld by individuals and single departments. Few companies have full central repositories with access to digital copies and metadata. Very few (if any) companies can analyze their corporate body of contracts and draw conclusions based on this analyze.
Do companies need to locate all their contracts? Well, after defining what all contracts means – but some agreements can probably be left out to separate systems (example: HR, end user agreements, specialized systems), but companies need to be in control. Instead of arguing, there is actually no excuse not to get in control of business critical documents.
Understand that Legal is part of a business process
A reflection from our work with Contract Management, network discussions, lectures and interactions with GCs, Corporate Counsels, is that GCs and lawyers should strongly re-consider the traditional detachment from the business processes and re-assess their role to become process owners and recognize that the legal task is a part of the overall Contract Management process among other tasks and acknowledge the use of data and analytic’s as a tool for contract review, strategy and negotiation.
So what is needed for the GC to step up?
This is our take on what is needed to step up. It bears similarities to an interesting article from Prashant Dubey’s “10 Ways GCs Can Cut the Cost of Contract Management” and his 10 strategies that GCs can use to increase the effectiveness of contract management, which gives a very good overview of the current status of GC’s role in contract management. Unfortunately, it is not available on the free internet anymore. And it misses one point – this is not solely a cost cutting game. It is a question of value – short and long term.
Laying the foundation
- The GC must assume ownership of the Contract Management process, but must refrain from getting involved in all contracting. The GC needs to acknowledge that his team (should) have a point of view in every phase of contracting. However, what needs to be discussed is how. We do not believe that more lawyers is the answer. A direct involvement in almost everything relating to the contract will not happen in most companies – due to organizational, cost, time and execution reasons. The GC must however through the contract management process have a say on everything in the contract process. You would need a central governance (system, repository, policies, templates, training, engagement rules) of the contract management process as such, but you also need ownership and execution in the business line (with proper support of Legal Department based on risk and reward analyze). Contract Management is not about getting all contracts drafted and review by lawyers, it is about getting suitable agreements executed in a swift and correct manner. And there are a lot of capable people to do that.
- Do invest in contract management business process & systems, enabled by workflow and repository technology, but do it wisely. Every company should invest in contract management technology even if kept to repository only. Central repository with all executed agreement and updated metadata is a given one, but otherwise you need to be careful with the roll out to avoid to kill the organization. There is a maturity aspect to this that is really important to understand. It is easy to fail if you want to do too much. There is of course lower hanging fruit that can be easily picked, as an example to find all executed agreements in the company that can be located. Do small pilot projects – showcasing that the company is paying its invoices too early losing out on a positive cash flow. This is a given start to any contract management implementation to get control over your legacy agreements, showcase a few value adds and the technology to do this efficiently is now out on the market.
- Seek and build alliance with the business. GC needs to agree with the business on how to work with agreements. As long as the GC comes with the approach that we shall make it easier to contract, with less risk and higher speed – the GC will be welcomed with open arms. The standard legal approach – we need to ensure that non-lawyers are not doing mistakes is not as successful. Just a piece of advice: Procurement would be another function that should share the interest of Contract Management – but Procurement often end up being locked down to a more operational focus or a focus on SRM, SPM and less focus on the actual contract leaving no room for more strategic initiatives – all leading to increased costs, lower revenue and increased and unknown contract risks. The focus from Legal and Procurement isolated is surely understandable as both have objectives towards the business but if comparing with Contract Management best practice, it clearly show that the most advanced and mature companies are the once that have succeeded in establishing the right balance between the Legal and Procurement allowing both to focus on their core areas and at the same time in a joint effort manage to bring the bottom line value to the table that comes from focusing on Contract Management. To an organization this clearly show that Legal is prepared to move in a new and more dynamic direction and at the same it means that Procurement can move away from the more transactional role and become a more strategic contributor to the organization.
- Educate and walk the walk/talk the talk. Talk to people every day about why the company needs contracts, how you can improve. Educate people in the line of fire on how to handle and what to escalate. Continue to talk and walk the walk – over and over again. It is an effort that must be repeated.
- Learn your contracts, the clauses and the risks. Analytics and big data is something that lawyers have a hard time to do. They are often caught in firefighting and analyses are saved for later – which then is put aside due to the next and latest fire. Further, they do not apply analytics as a work model – they review. The individual contract is seen in light of experience, not in light of other facts. There are now tools on the market that can help you with your analyze. When doing this job you need to apply a risk model to it – where do we have the largest risk and why should we as a Legal Department spent our time on it? A Legal Department that does not prioritize its daily work will fail in working with the most important stuff. Furthermore, the GC must ensure that he puts legal work in context; not focusing on business impacts can no longer be accepted.
- Take Contract Management to the Top Managements agenda. Top management support is essential for reaching out to those not convinced – don’t forget to use your “friends” in the company. But don’t come too early – you need to be able to show evidence of why it is important and not just stay with high flying theory.
- Evolve Contract Management system functionality and roll out. When having the basic foundation in place, it is time to start implementing other functionality to become even better. Document creation, workflow, e-signatures, etc. There are many functions to deploy – but keep it simple and always have the maturity of your organization in mind. Otherwise you will fail.
- Use advanced technology. There are pretty sophisticated contract technologies out there now. There is a lot of knowledge hidden in your contract estate. You can actually ask your database of contracts: “which contracts do have any CSR obligation” and “which have our own CSR language”; and thus become aware of the differences. This work was virtually impossible 6 months ago, unless you had an army of tireless contract surveyors at hand.
- Apply contract risk management methods. When you ask a lawyer what he is doing, he would probably say that he is handling legal risk and negotiation support. Most lawyers do not apply any method for this and the “risk management” is merely “I have reviewed the agreement and made my comments”. All Legal Departments should work on the contractual risk management model as the base for all the contract work that is being done.
Conclusion & Remarks
The Legal Department and the GC are in the center court of their companies with large corporate legacy knowledge, access to C-level and operational levels, the right to influence and build excellent contractual and commercial knowledge, but many are sitting watching the game or maybe carrying the water-bottles instead of really trying to influence the game.
Contract management should be the foundation for any work related to contracts carried out in a company – both as a system and method. If the GCs are prepared to take on this responsibility, they can start delivering true value in form of lessened contractual risk, put the Legal department on the map as a contributor to the company bottom line changing the perception that Legal is about dragging out the process or even be considered to be overprotective and contribute to less contract leakage, higher contract value, reduced administration and at the same time build a better place to work for GC and his team. It is time for the General Counsels to embark on this journey.
The authors of this article, Magnus Steen of Contract Business Intelligence and former deputy General Counsel of Sony Ericsson has worked with transformation of legal departments in several companies, provided advise to several global companies on how to initiate cross discipline Contract Management programs including systems and establishing governance, processes and procedures and Martin Lonstrup, a Danish Lawyer, having worked with contract management and legal for the last 8 years, founded the Danish Contract Management Association (DCMA), former Chairman of DCMA. Martin has worked with operational contract lifecycle management in different companies and industries, implemented legal department governance models, policies, CM processes, CM tools, compliance, legal processes, financial optimization. Most recently Martin has in the role as Senior Legal Counsel and Business Lead on implementing a new contract management tool in the Maersk Group globally across +16 business units, +120 countries and +16 ERP systems before moving to a new position within the Maersk Group in Maersk Oil Houston working in the area of Legal and Procurement.